The Commercial Building Deduction, otherwise known as the 179D deduction, encourages building owners to increase energy efficiency in new and remodeled buildings by providing an immediate tax deduction for costs incurred which increase the energy efficiency of a building.
The 179D deduction was enacted as part of the Energy Policy Act of 2005. These costs would generally be depreciated over 15, 27.5, or 39 years.
The maximum deduction is $1.80/square foot of building space. A building must achieve a reduction in energy cost of at least 50% in total annual energy power costs, as compared to a “reference building” in order to achieve the maximum benefit.
This allows for minimum requirements to be put in place for the energy-efficient design of new buildings so they may be constructed, operated, and maintained in a manner that minimizes energy use without constraining the building function or the comfort and productivity of the occupants.
179D caters more towards larger buildings because the deduction is based on the square footage.
The energy savings are measured by reference to three main building system categories:
- Interior lighting
- Heating, cooling, ventilation, and hot water systems
- Building envelope
If a building doesn’t meet the 50% energy savings threshold, a partial deduction is available of up to $0.60/square foot.
Commercial buildings of any size qualifies for the deduction as long as it’s new construction along with residential rental buildings that are newly constructed as long as they are four or more stories.
Renovations and retrofits of existing structures are also eligible to receive the deduction. All buildings must be located in the United States.